The stock market seems to be worrying about the potential impact of US tariffs. And that makes it a good time to be thinking about buying shares.
For some stocks, this might be justified – increased costs could well weigh on corporate profits. But in other cases, the market might be overreacting.
Inflation
The immediate issue with tariffs is that companies manufacturing outside the US will have to deal with higher costs. The likes of Nike and Apple are good examples.
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There’s a decent chance this will result in higher prices for consumers. And this happening on a large scale could mean significantly more pressure on household budgets.
In that situation, demand for non-essential items might well fall sharply. And that could present a challenge for companies like Disney and Netflix – even with their US-based operations.
This means looking for stocks that are insulated from the effect of tariffs isn’t as simple as finding businesses with US operations. But there are some I think are worth considering.
Compass Group
Compass Group (LSE:CPG) is one example. The contract caterer is a FTSE 100 company with around two-thirds of its operations based in the US.
People need to eat even in an inflationary environment. And a huge scale advantage means customers are unlikely to save money by switching away from the firm.
The pressure the US healthcare sector’s under could have consequences for Compass. But while that’s a potential risk, it has nothing to do with inflation or tariffs.
Compass has the benefit of economies of scale and supplies a product people can’t do without. That’s given it the power to pass on higher costs before and I think it will continue to do so.
Berkshire Hathaway
It’s not the most imaginative choice, but I expect Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) to be good in a crisis. To some extent, it’s what the company’s built for.
There’s a risk some of the firm’s core operations – such as energy and railroads – could see weaker demand in a recession. On top of this, inflation isn’t good for insurance costs.
Nonetheless, I think Berkshire’s huge cash reserves make it more resilient than its rivals. And lower share prices could present Buffett’s team with some outstanding opportunities.
A lot of commentators were critical of Buffett’s inaction during Covid-19. But with the Federal Reserve looking less forthcoming, things might be different this time.
Defensive growth
US tariffs aren’t just a problem for firms that sell products in the US and make them elsewhere. Inflation in general could be a challenge even for domestic businesses.
When it comes to the stock market, there’s no such thing as complete safety. But I think Compass Group and Berkshire Hathaway are likely to prove more resilient than most.
I expect Compass to benefit from relatively resilient demand. And for a company with Berkshire Hathaway’s cash reserves, lower share prices might be an opportunity.
